FOURTH MODIFICATION AGREEMENT


         BY THIS  FOURTH  MODIFICATION  AGREEMENT  (the  "Agreement"),  made and
entered  into as of the 24th day of October,  1996,  WELLS FARGO BANK,  NATIONAL
ASSOCIATION, as successor in interest to FIRST INTERSTATE BANK OF ARIZONA, N.A.,
whose address is Post Office Box 29742, Phoenix,  Arizona 85038-9742,  Corporate
Banking Division (hereinafter called "Lender"),  and THREE-FIVE SYSTEMS, INC., a
Delaware  corporation,  whose address is 1600 North Desert Drive, Tempe, Arizona
85281-1212  (hereinafter  called  "Borrower"),  in  consideration  of the mutual
covenants  herein  contained  and other  good and  valuable  consideration,  the
receipt and  sufficiency  of which is hereby  acknowledged,  hereby  confirm and
agree as follows:

SECTION 1.        RECITALS.

         1.1 Borrower and Lender  entered into a Loan  Agreement  dated July 11,
1994 (the "Loan  Agreement"),  which  provided for a revolving line of credit by
Lender to Borrower in the  subsequently  amended amount of  $15,000,000.00  (the
"RLC Commitment  Amount") upon the terms and conditions  contained  therein (the
"RLC").

         1.2 The RLC is evidenced by a Revolving  Promissory Note dated December
21, 1995, executed by Borrower, payable to the order of Lender, in the principal
amount of $15,000,000.00  (the "RLC Note").  (Hereinafter the Loan Agreement and
the RLC Note are referred to as the "Loan Documents.")

         1.3 Lender and  Borrower  have  executed  and  delivered  previously  a
Modification  Agreement  dated  as of  June  28,  1995,  a  Second  Modification
Agreement dated as of December 22, 1995 and a Third Modification Agreement dated
as of August 5, 1996 (collectively,  the "Modifications") modifying the terms of
the Loan Documents. Hereinafter, "RLC Note" and "Loan Agreement" shall mean such
documents as modified in the Modifications.

         1.4  Borrower  and Lender  desire to modify the Loan  Documents  as set
forth herein.

         1.5 All undefined  capitalized terms used herein shall have the meaning
given them in the Loan Agreement.

SECTION 2.        RLC NOTE.

         As of the  date  hereof,  prior  to  the  effect  of the  modifications
contained herein, the outstanding principal balance of the RLC Note is $0.
                                       -1-
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SECTION 3.        LOAN AGREEMENT.

         3.1 The following  definitions in Section 2.1 of the Loan Agreement are
amended to read as follows:

                  "Advance" means either an RLC Advance or a Term Advance.

                  "Convert,"  "Conversion"  and  "Converted"  each  refers  to a
         conversion of an Advance of one Type into an Advance of another Type.

                  "Eurodollar  Reserve  Percentage"  for the Interest Period for
         each LIBOR Rate Advance means the reserve percentage applicable two (2)
         Business  Days  before  the first  day of such  Interest  Period  under
         regulations  issued from time to time by the Board of  Governors of the
         Federal  Reserve System (or any successor) for  determining the maximum
         reserve  requirement  (including,  but not limited  to, any  emergency,
         supplemental,  or other marginal reserve requirement) for a member Bank
         of  the  Federal  Reserve  System  in San  Francisco  with  respect  to
         liabilities   or  assets   consisting  of  or  including   Eurocurrency
         Liabilities (or with respect to any other category of liabilities which
         includes deposits by reference to which the interest rate on LIBOR Rate
         Advances is determined) having a term equal to such Interest Period.

                  "Financial   Covenants"   means  those   financial   covenants
         specified in Sections 7.8 through 7.13.

                  "Interest  Period"  means,  for each LIBOR Rate  Advance,  the
         period commencing on the date of such LIBOR Rate Advance or the date of
         the Conversion of any Advance into such a LIBOR Rate Advance and ending
         on the last day of the period selected by the Borrower  pursuant to the
         provisions herein and, thereafter, each subsequent period commencing on
         the day after the last day of the immediately preceding Interest Period
         and  ending  on the last day of the  period  selected  by the  Borrower
         pursuant to the provisions herein. With respect to LIBOR Rate Advances,
         the duration of each such  Interest  Period shall be (a) 30, 60, 90, or
         180 days, or (b) as to the Term Loan after the Term  Termination  Date,
         30, 60 or 90 days, as the Borrower may select; provided, however, that:

                           (i) Interest Periods  commencing on the same date for
                  the same Type of Advances shall be of the same duration;

                           (ii)  Whenever  the last day of any  Interest  Period
                  would  otherwise occur on a day other than a Business Day, the
                  last day of such Interest Period shall be extended to occur on
                  the  next  succeeding  Business  Day,  provided  that  if such
                  extension  would cause the last day of such Interest Period to
                  occur in the next following calendar
                                      -2-
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                  month, the last day of such Interest Period shall occur on the
                  next preceding Business Day; and

                           (iii) No  Interest  Period  with  respect  to any RLC
                  Advance  shall  extend  beyond the RLC  Maturity  Date or with
                  respect  to any Term  Advance  shall  extend  beyond  the Term
                  Maturity Date.

                  "LIBOR  Base Rate"  means,  for the  Interest  Period for each
         LIBOR Rate  Advance,  an  interest  rate per annum equal to the rate of
         interest  per  annum  obtained  by  dividing  (i) the rate of  interest
         determined by Lender,  based on Telerate  System  reports or such other
         source selected by Lender, to be the "London Interbank Offered Rate" at
         which  deposits  in U.S.  dollars are offered by major banks in London,
         England,  two (2) Business  Days before the first day of such  Interest
         Period by (ii) a percentage  equal to one hundred  percent (100%) minus
         the Eurodollar Reserve Percentage for the period equal to such Interest
         Period.

         3.2 Section 2.1 of the Loan Agreement is amended by the addition of the
following definitions:

                  "Fixed Rate" means an interest rate per annum equal to two and
         one-half percent (2.5%) in excess of the Treasury Rate.

                  "LIBOR Rate Advance"  means either a LIBOR Rate RLC Advance or
         a LIBOR Rate Term Advance.

                  "LIBOR  Rate Term  Advance"  means a Term  Advance  that bears
         interest at the applicable Term LIBOR Rate.

                  "Loans," each a "Loan," means the RLC and the Term Loan.

                  "Notes," each a "Note," means the RLC Note and the Term Note.

                  "Notice of Term Advance":  See Section 3A.3(b).

                  "Obligations"  means all  obligations  of Borrower  under this
         Agreement,  the Notes,  the Security  Agreement and any other documents
         delivered by Borrower to Lender with respect to the Loans.

                  "Prime  Rate Term  Advance"  means a Term  Advance  that bears
         interest at the Prime Rate.

                  "Security Agreement":  See Section 3A.9(a).

                  "Term  Advance"  means prior to the Term  Termination  Date an
         advance  by Lender to the  Borrower  under  the Term Loan  pursuant  to
         Section  3A.3 and  includes a Prime  Rate Term  Advance or a LIBOR Rate
         Term  Advance  (each of which shall be a "Type" of Term
                                      -3-
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         Advance), and after the Term Termination Date, it means the Term Loan.

                  "Term Commitment Amount" means $5,000,000.00.

                  "Term LIBOR  Rate"  means an interest  rate per annum equal to
         two and  one-quarter  percent (2.25%) in excess of the LIBOR Base Rate,
         rounded upward, if necessary, to the nearest 1/16 of 1%.

                  "Term  Loan" means that Loan  evidenced  by the Term Note made
         pursuant to Section 3A.1 hereof by Lender to Borrower.

                  "Term Maturity Date" means October 24, 2000.

                  "Term Note" means that Promissory Note dated as of October 24,
         1996 in the face  amount  equal to the Term  Commitment  Amount made by
         Borrower payable to the order of Lender,  evidencing the Term Loan, and
         extensions, modifications and renewals thereof.

                  "Term Payment Date" means:

                           (a) As to each Prime Rate Term Advance,  the last day
                  of each month;

                           (b) As to each LIBOR Rate Term  Advance,  the earlier
                  of the last day of the Interest Period or the ninetieth (90th)
                  day after the beginning of the Interest Period; and

                           (c) As to the Term Loan should it accrue  interest at
                  the Fixed Rate, the Quarterly End Date.

                  "Term Termination Date" means October 24, 1997.

                  "Treasury  Rate" means the yield in percent per annum as shown
         for three (3) year United States  Treasury  constant  maturities on the
         Federal Reserve statistical release H.15 (519) for the most recent week
         prior to the Term Termination Date.

         3.3 The Loan  Agreement  is amended by the  addition  of the  following
Article 3A:

                                   ARTICLE 3A
                                   ----------

                                    TERM LOAN
                                    ---------

                  Section 3A.1 Term Commitment Amount. Subject to the conditions
         set forth herein,  Lender,  from time to time, shall make Term Advances
         as  Borrower  may  request,  as  provided  below,   provided  that  the
         outstanding  principal  balance  shall not exceed  the Term  Commitment
                                      -4-
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         Amount.  Until the Term Termination Date, the Term Loan shall be a line
         of  credit,  against  which  Term  Advances  may be made  to  Borrower,
         provided  that (i)  Borrower is not in default  under any  provision of
         this Agreement, and (ii) no Term Advance shall be made that would cause
         the outstanding  principal  balance of the Term Loan to exceed the Term
         Commitment  Amount. The Term Loan is not a revolving line of credit and
         once a Term Advance is disbursed  and repaid,  it may not be reborrowed
         again. On and after the Term Termination Date, no further Term Advances
         shall be made to Borrower under the Term Loan.

                  Section  3A.2 Term Note.  The Term Loan shall be  evidenced by
         the Term Note, in the form approved by Lender,  payable to the order of
         Lender upon the terms and conditions therein contained.

                  Section 3A.3 Term Advances.

                           (a) Unless otherwise specifically approved in writing
                  by Lender, the proceeds of the Term Loan shall be used only to
                  purchase treasury stock or, so long as the aggregate amount of
                  Term  Advances  shall  not  exceed  the  aggregate  amount  of
                  Borrower's  purchase of treasury stock, to reimburse  Borrower
                  for prior purchases of treasury stock.

                           (b) Lender  may from time to time make Term  Advances
                  in such sums as Borrower shall request. Each such Term Advance
                  shall be in the minimum amount of $100,000.00.

                           (c) The Borrower shall give Lender written notice, or
                  telephonic  notice  confirmed  immediately in writing,  of the
                  request  for any Term  Advances  under this  Agreement,  which
                  notice  (the  "Notice of Term  Advance")  shall be received by
                  Lender not later than 11:00 A.M. (Phoenix, Arizona local time)
                  on the same  Business Day in the case of a Prime Rate Advance,
                  and in the case of a LIBOR  Rate Term  Advance  not later than
                  2:00 p.m. (Phoenix, Arizona local time) on the second Business
                  Day before the date of the proposed  Term  Advance.  Each such
                  Notice  of Term  Advance  shall  specify:  (i) the date of the
                  proposed Term  Advance,  (ii) the amount of such Term Advance,
                  (iii)  the  Type of Term  Advance,  and  (iv) in the case of a
                  LIBOR Rate Term Advance,  the Interest Period.  Each Notice of
                  Term Advance shall be irrevocable and binding on the
                                      -5-
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                  Borrower. Anything herein to the contrary notwithstanding,  no
                  LIBOR Rate Term Advance shall be less than $50,000.00.

                           (d) In the case of any Term Advance which the related
                  Notice of Term Advance specifies that it is to be a LIBOR Rate
                  Term Advance,  the Borrower shall  indemnify  Lender on demand
                  for, from, and against any loss or expense  incurred by Lender
                  as a result of any failure by Borrower to fulfill on or before
                  the date  specified  in such  Notice of Term  Advance for such
                  Term Advance the  applicable  conditions  set forth in Section
                  4.2, including, without limitation, any loss, including, other
                  losses,  costs,  and expenses  incurred by Lender by reason of
                  liquidation  or   reemployment  of  deposits  or  other  funds
                  acquired  by Lender to fund the LIBOR Rate Term  Advance to be
                  made by Lender when such LIBOR Rate Term Advance,  as a result
                  of such failure, is not made on such date.

                  Section 3A.4 Conversion of Term Advances.

                           (a) The  Borrower  may,  upon  written  notice to and
                  received by the Lender (i) not later than 2:00 p.m.  (Phoenix,
                  Arizona  local  time) on the  second  Business  Day before the
                  requested  Conversion,  in the case of any Conversion of Prime
                  Rate Term Advances into LIBOR Rate Term Advances, and (ii) not
                  later than 11:00 A.M.  (Phoenix,  Arizona  local  time) on the
                  same  Business  Day as the  Conversion,  in  the  case  of any
                  Conversion  of LIBOR Rate Term  Advances  into Prime Rate Term
                  Advances,  subject to the  provisions  of this  Section  3A.4,
                  Convert any Term  Advances  of one Type into Term  Advances of
                  another Type; provided,  however, that any Conversion of LIBOR
                  Rate  Term  Advances  made on other  than the last day of said
                  Term  Advances's   Interest  Period  shall  be  made  only  on
                  condition   that  Borrower  pays  all  amounts   specified  in
                  connection therewith in Section 3A.8(e). Each such notice of a
                  Conversion  shall be irrevocable  and binding on the Borrower.
                  Each  such   notice  of  a   Conversion   shall,   within  the
                  restrictions  specified  above,  specify  (w) the date of such
                  Conversion (x) the Term Advances to be Converted, (y) the Type
                  of Term  Advances  into  which  the  Term  Advances  are to be
                  Converted, 
                                       -6-
<PAGE>
                  and (z) if such  Conversion is into LIBOR Rate Term  Advances,
                  the  duration  of the  Interest  Period  for  each  such  Term
                  Advance.

                           (b) If the  Borrower  should  fail to give the Lender
                  any notice of Conversion  upon the termination of the Interest
                  Period for a LIBOR Rate Term Advance,  such Term Advance, upon
                  the termination of the Interest  Period,  shall  automatically
                  become a Prime Rate Term Advance.

                  Section 3A.5 Term Loan Payments.

                           (a) Until the Term Termination Date,  interest on the
                  Term Loan shall  accrue on the  principal  balance of the Term
                  Loan  from  time to time  outstanding  under  the Term Note as
                  follows:

                                    (i) At the Prime  Rate if it is a Prime Rate
                           Term Advance.

                                    (ii) At the applicable Term LIBOR Rate if it
                           is a LIBOR Rate Term Advance.

                           (b) After the Term Termination Date,  interest on the
                  Term Loan shall accrue as follows:

                                    (i) At the Fixed Rate if Borrower shall have
                           elected by written  notice to Lender by no later than
                           11:00 a.m. (Phoenix,  Arizona local time) on the Term
                           Termination  Date that interest  should accrue at the
                           Fixed  Rate,  commencing  the next day,  at the Fixed
                           Rate.  Borrower's right to elect that interest accrue
                           at the  Fixed  Rate  shall  terminate  at 11:00  a.m.
                           (Phoenix, Arizona local time) on the Term Termination
                           Date.

                                    (ii)  Otherwise  at either the Prime Rate or
                           the Term LIBOR Rate as Borrower shall elect from time
                           to time; provided that at any one time after the Term
                           Termination  Date interest shall accrue on the entire
                           Term  Loan at  either  the  Prime  Rate  or the  then
                           applicable Term LIBOR 
                                      -7-
<PAGE>
                           Rate based on a single Interest Period.

                           (c) All accrued  interest shall be due and payable on
                  the Term Payment Date.

                           (d) Principal payments shall be made in equal amounts
                  on each Quarterly End Date  commencing on the first  Quarterly
                  End Date after the Term Termination Date,  sufficient to fully
                  amortize  the  Term  Loan  balance  outstanding  on  the  Term
                  Termination Date on the Term Maturity Date.

                           (e) The entire  outstanding  principal balance of the
                  Term Note, all accrued and unpaid  interest and all other sums
                  which  may have  become  payable  thereunder  shall be due and
                  payable in full on the Term Maturity Date.

                  Section 3A.6 Term Loan  Prepayments.  Borrower  shall have the
         option to prepay the Term Loan, in full or in part at any time, subject
         to payment of the following:

                           (a) With respect to any LIBOR Rate Term Advance,  all
                  amounts specified in Section 3A.8(a).

                           (b) In the event the Term Loan is  accruing  interest
                  at the Fixed Rate,  an amount  equal to a  prepayment  premium
                  computed as follows:

                                    1% of the outstanding  principal  balance if
                           the  outstanding   principal  balance  is  less  than
                           $50,000.00,  and if the outstanding principal balance
                           is equal to or more than $50,000.00,  an amount equal
                           to [the  present  value of the  remaining  cash flows
                           calculated  with an  interest  rate  assuming  that a
                           Determination  of Taxability had occurred  discounted
                           at the  Treasury  Constant  Yield  (TCY) + 100  basis
                           points]   -   outstanding   principal.   The  TCY  is
                           calculated  as  the  interpolated  constant  maturity
                           Treasury rate with a maturity  matching the remaining
                           average  term of the Term  Note to the Term  Maturity
                           Date.   Rate  data  is  obtained,   at  the  time  of
                           prepayment,  
                                      -8-
<PAGE>
                           from  the most  recent  Federal  Reserve  statistical
                           release H.15 (519).

                  Section 3A.7 Term Loan Commitment Fee.  Borrower agrees to pay
         to Lender an  upfront  commitment  fee equal to 30 basis  points of the
         Term Commitment Amount upon the closing of the Term Loan.

                  Section  3A.8  Additional   Provisions  for  LIBOR  Rate  Term
         Advances.

                  (a)  Unavailability  of Deposits or Inability to Ascertain the
         Rates.  Notwithstanding any other provision of this Agreement, if prior
         to the commencement of any Interest Period,  Lender shall determine (i)
         that United States dollar deposits in the amount of any LIBOR Rate Term
         Advance to be outstanding  during such Interest  Period are not readily
         available to Lender in the London interbank  market,  or (ii) by reason
         of circumstances  affecting the London interbank  market,  adequate and
         reasonable  means do not exist for  ascertaining  the LIBOR  Base Rate,
         then Lender shall  promptly give notice thereof to the Borrower and the
         obligation of Lender to create,  or effect by conversion any LIBOR Rate
         Term  Advance  in  such  amount  and for  such  Interest  Period  shall
         terminate  until United States  dollar  deposits in such amount and for
         the Interest  Period  selected by the  Borrower  shall again be readily
         available  in the market and adequate  and  reasonable  means exist for
         ascertaining the LIBOR Base Rate.

                  (b) Increased  Costs.  (i) If, due to any  Regulatory  Change,
         there  shall be any  increase in the cost to Lender of agreeing to make
         or making,  funding or maintaining LIBOR Rate Term Advances (including,
         without   limitation,   any   increase   in  any   applicable   reserve
         requirement), then the Borrower shall from time to time, upon demand by
         Lender,  pay to Lender such amounts as Lender may reasonably  determine
         to be necessary to compensate  Lender for any additional costs which it
         reasonably  determines are attributable to such Regulatory Change; (ii)
         if Lender  determines (in its reasonable  discretion) that, as a result
         of any Regulatory Change, the amount of capital required or expected to
         be  maintained by Lender is increased by or based upon the existence of
         Lender's commitment to lend hereunder, then, upon demand by Lender, the
         Borrower  shall  immediately  pay to Lender such  amounts as Lender may
         reasonably  determine  to be  necessary  to  compensate  Lender for any
         additional costs which it reasonably determines are attributable to the
         maintenance  by Lender of capital in respect of Lender's  commitment to
         lend  hereunder;  and (iii)  Lender  will  
                                      -9-
<PAGE>
         notify the Borrower of any  Regulatory  Change that will entitle Lender
         to   compensate   pursuant  to  this   paragraph  (b)  as  promptly  as
         practicable,  but in any event  within  90 days  after  Lender  obtains
         knowledge thereof; provided, however, that if Lender fails to give such
         notice  within 90 days after it obtains  knowledge of such a Regulatory
         Change,  Lender shall, with respect to compensation  payable in respect
         of any costs resulting from such Regulatory Change, only be entitled to
         payment  for costs  incurred  from and after the date that  Lender  has
         given  such  notice.  Lender  will  furnish to  Borrower a  certificate
         setting  forth in  reasonable  detail  the basis for the amount of each
         request  by Lender  for  compensation.  Determination  by Lender of the
         amounts  required by  compensate  Lender  shall be made on a reasonable
         basis.  Lender shall be entitled to compensation in connection with any
         Regulatory Change only for costs actually incurred by such Lender. Upon
         receipt of notice of any such Regulatory  Change from Lender,  Borrower
         shall have the option to prepay or Convert any Term Advances  adversely
         affected by any  Regulatory  Change within seven (7) days of receipt of
         such notice,  without the  obligation  to pay to Lender with respect to
         such prepayment or Conversion any amount or amounts  otherwise  payable
         to Lender by Borrower pursuant to Section 3A.8(e).

                  (c)  Illegality.  Notwithstanding  any other provision of this
         Agreement,  if Lender shall  notify the Borrower  that as a result of a
         Regulatory  Change it is unlawful for Lender to perform its obligations
         hereunder to make LIBOR Rate Term Advances or to fund or maintain LIBOR
         Rate Term Advances  hereunder (i) the  obligation of Lender to make, or
         to Convert  Term  Advances  into, a LIBOR Rate Term  Advances  shall be
         suspended  until Lender shall notify  Borrower  that the  circumstances
         causing  such  suspension  no longer  exist and (ii) in the event  such
         Regulatory  Change makes the  maintenance  of LIBOR Rate Term  Advances
         hereunder  unlawful,  the Borrower shall  forthwith  prepay in full all
         LIBOR Rate Term  Advances  then  outstanding,  together  with  interest
         accrued  thereon and all  amounts in  connection  with such  prepayment
         specified  in Section  3A.8(e),  unless the  Borrower,  within five (5)
         Business  Days of notice  from  Lender,  Converts  all LIBOR  Rate Term
         Advances then  outstanding  into Prime Rate Term Advances in accordance
         with  Section  3A.4  and pays  all  amounts  in  connection  with  such
         prepayments specified in Section 3.8(e).

                  (d)   Discretion   of  Lender   as  to   Manner  of   Funding.
         Notwithstanding any provision of this Agreement to the contrary, Lender
         shall be entitled to fund and  maintain  
                                      -10-
<PAGE>
         its  funding  of all or any part of any Term  Advance  in any manner it
         sees fit; provided,  however,  that for the purposes of this Agreement,
         all  determinations  hereunder  shall be made as if Lender had actually
         funded and maintained  each LIBOR Rate Term Advance during the Interest
         Period  therefor  through the  purchase  of deposits  having a maturity
         corresponding  to the last day of the  Interest  Period and  bearing an
         interest rate equal to the Term LIBOR Rate for such Interest Period.

                  (e) Funding Loss Indemnification. Borrower shall pay to Lender
         such amount of amounts as shall be  sufficient  to  compensate  for any
         losses (including without limitation loss of anticipated profit), costs
         or expenses which Lender may reasonably incur as a result of payment or
         Conversion  of any  LIBOR  Rate  Term  Advance  other  than on the last
         Business Day of the Interest Period for such Term Advance,  whether due
         to  prepayment,  Conversion,  illegality  (pursuant to Section  3A.8(c)
         above), acceleration of the Term Maturity Date or for any other reason.

                  Section  3A.9  Security.  So long  as the  Term  Loan  remains
         outstanding Borrower agrees as follows:

                           (a) To secure  its  obligations  with  respect to the
                  Term Loan by granting to Lender a security  interest in all of
                  Borrower's  equipment located in the State of Arizona pursuant
                  to a security agreement (the "Security  Agreement")  delivered
                  by Borrower to Lender;

                           (b) Not to create or suffer to be created or to exist
                  any mortgages,  pledges,  security interests,  encumbrances or
                  other liens on its real property  located at 1600 North Desert
                  Drive,  Phoenix,  Arizona  at any time  that in the  aggregate
                  exceed $100,000.00; and

                           (c) To apply  immediately  all proceeds from the sale
                  of any treasury stock to the outstanding  principal balance of
                  the Term Loan.

         3.4 All  references  in  Articles  5,  6,  7,  8, 9 and 10 of the  Loan
Agreement:

                           (a) to "RLC Note" are hereby  amended to read  "Note"
                  or "Notes", as applicable;
                                      -11-
<PAGE>
                           (b) to "RLC" are  hereby  amended  to read  "Loan" or
                  "Loans", as applicable; and

                           (c) to "RLC  Advances"  are  hereby  amended  to read
                  "Advance" or "Advances", as applicable.

         3.5  Section  7.2 of the Loan  Agreement  is hereby  amended to read as
follows:

                  Section  7.2.  Create or suffer to be  created or to exist any
         mortgages,  pledges,  security  interests,  encumbrances or other liens
         that at any time in the aggregate exceed $100,000.00:

                           (a) on its real property; or

                           (b) on its accounts receivable.

         3.6 Section 7.4 of the Loan Agreement is amended to read as follows:

                  Section 7.4 Declare or pay any cash  dividend or purchase  any
         treasury stock greater than $10,000,000.00.

         3.7 The first paragraph of Section 7.8 of the Loan Agreement is amended
to read as follows:

                  Section  7.8  Permit its  Tangible  Net Worth to be as of each
         Quarterly End Date:

                           (a) less than $42,500,000 plus fifty percent (50%) of
                  the  aggregate  of  Borrower's  positive  net  income  of each
                  quarterly  period,  beginning June 30, 1996, with no deduction
                  for any  quarterly  period net loss,  plus (b) any  additional
                  paid-in equity capital.

         3.8 Section  7.10 of the Loan  Agreement  is amended by the addition of
the following:

                  Notwithstanding  anything herein to the contrary, for purposes
         of the calculation of "cash flow",  the inventory  reserve taken in the
         third  fiscal  quarter  of 1996 (the  "1996  Adjustment")  shall not be
         considered in the calculation of net income for the relevant period.

         3.9 Section 7.11 of the Loan Agreement is amended to read as follows:

                  Section 7.11 Permit its annual capital  expenditures to exceed
         the sum of $5,000,000.00.
                                      -12-
<PAGE>
         3.10 Article 7 of the Loan  Agreement is amended by the addition of the
following Section 7.13:

                  Section 7.13 Permit,  in fiscal year 1997 and thereafter,  (i)
         its annual  operating net result to be negative,  or (ii) its operating
         net result to be negative for two or more consecutive  quarterly fiscal
         periods.

         3.11  Section  8.1(h)  of the  Loan  Agreement  is  amended  to read as
follows:

                           (h) The  occurrence of any default under (i) any Note
                  or any document or instrument  given by Borrower in connection
                  with any  other  indebtedness  of  Borrower  to  Lender or any
                  affiliate  thereof  and the  expiration  of any  grace  period
                  provided therein,  or (ii) any other indebtedness in excess of
                  $1,000,000   of  Borrower  to  any  other   creditor  and  the
                  expiration of any grace period provided therein;

         3.12  Exhibit "B" to the Loan  Agreement is amended to read as attached
hereto.

SECTION 4.        OTHER MODIFICATIONS, RATIFICATIONS AND AGREEMENTS.

         4.1 All  references  to the Loan  Agreement  in the RLC Note are hereby
amended to refer to the Loan Agreement as hereby amended.

         4.2 Borrower  acknowledges  that the indebtedness  evidenced by the RLC
Note is just and  owing,  that the  balance  thereof is  correctly  shown in the
records  of  Lender  as of the  date  hereof,  and  Borrower  agrees  to pay the
indebtedness evidenced by the RLC Note according to the terms thereof, as herein
modified.

         4.3 Borrower  hereby  reaffirms to Lender each of the  representations,
warranties,  covenants and  agreements of Borrower set forth in the RLC Note and
the Loan  Agreement,  with the same force and effect as if each were  separately
stated herein and made as of the date hereof.

         4.4 Borrower hereby ratifies, reaffirms,  acknowledges, and agrees that
the  RLC  Note  and  the  Loan  Agreement,   represent  valid,  enforceable  and
collectible  obligations  of  Borrower,  and that there are no existing  claims,
defenses,  personal or otherwise, or rights of setoff whatsoever with respect to
any of these documents or instruments.  In addition,  Borrower hereby  expressly
waives,  releases and absolutely and forever  discharges  Lender and its present
and former shareholders,  directors,  officers,  employees and agents, and their
separate and respective heirs, personal 
                                      -13-
<PAGE>
representatives,  successors and assigns, from any and all liabilities,  claims,
demands,  damages,  action and causes of action,  whether  known or unknown  and
whether  contingent or matured,  that Borrower may now have, or has had prior to
the date hereof, or that may hereafter arise with respect to acts,  omissions or
events  occurring prior to the date hereof and,  without limiting the generality
of the  foregoing,  from  any and all  liabilities,  claims,  demands,  damages,
actions and causes of action, known or unknown,  contingent or matured,  arising
out of, or in any way connected with, the RLC. Borrower further acknowledges and
represents that no event has occurred and no condition exists that, after notice
or lapse of time, or both, would constitute a default under this Agreement,  the
RLC Note or the Loan Agreement.

         4.5 All terms,  conditions  and provisions of the RLC Note and the Loan
Agreement are continued in full force and effect and shall remain unaffected and
unchanged  except  as  specifically  amended  hereby.  The RLC Note and the Loan
Agreement,  as amended  hereby,  are hereby ratified and reaffirmed by Borrower,
and Borrower specifically acknowledges the validity and enforceability thereof.

SECTION 5.        GENERAL.

         5.1 This  Agreement  in no way acts as a release or  relinquishment  of
those  rights  securing  payment of the RLC.  Such  rights are hereby  ratified,
confirmed, renewed and extended by Borrower in all respects.

         5.2 The modifications contained herein shall not be binding upon Lender
until Lender shall have received all of the following:

                  (a) An  original  of  this  Agreement  fully  executed  by the
         Borrower.

                  (b)  Such  resolutions  or   authorizations   and  such  other
         documents as Lender may  reasonably  require  relating to the existence
         and good  standing  of the  Borrower  and the  authority  of any person
         executing this Agreement or other documents on behalf of the Borrower.

                  (c) The Security Agreement fully executed by the Borrower.

                  (d) The Term Note fully executed by the Borrower.

                  (e)  A  UCC-1  Financing   Statement  fully  executed  by  the
         Borrower.

                  (f) A  commitment  fee with  respect  to the Term  Loan in the
         amount of $15,000.00.
                                      -14-
<PAGE>
         5.3 Borrower shall execute and deliver such additional documents and do
such other acts as Lender may reasonably  require to fully  implement the intent
of this Agreement.

         5.4  Borrower  shall  pay all costs and  expenses,  including,  but not
limited  to,  reasonable  attorneys'  fees  incurred  by  Lender  in  connection
herewith,  whether or not all of the conditions described in Paragraph 5.2 above
are satisfied.  Lender, at its option,  but without any obligation to do so, may
advance funds to pay any such costs and expenses that are the  obligation of the
Borrower,  and all such funds  advanced  shall bear interest at the highest rate
provided in the RLC Note and shall be due and payable upon demand.

         5.5 Notwithstanding anything to the contrary contained herein or in any
other  instrument  executed  by Borrower  or Lender,  or in any other  action or
conduct  undertaken  by  Borrower  or Lender on or before the date  hereof,  the
agreements,  covenants and provisions contained herein shall constitute the only
evidence of Lender's  consent to modify the terms and provisions of the RLC Note
or the Loan Agreement. Accordingly, no express or implied consent to any further
modifications  involving  any of the  matters  set  forth in this  Agreement  or
otherwise shall be inferred or implied by Lender's  execution of this Agreement.
Further,  Lender's  execution of this  Agreement  shall not  constitute a waiver
(either express or implied) of the requirement that any further  modification of
the RLC or of the RLC Note or the Loan  Agreement,  shall  require  the  express
written  approval of Lender;  no such approval  (either  express or implied) has
been given as of the date hereof.

         5.6 Time is hereby  declared to be of the essence hereof of the RLC, of
the RLC Note and of the Loan Agreement, and Lender requires, and Borrower agrees
to, strict  performance  of each and every  covenant,  condition,  provision and
agreement hereof, of the RLC Note and the Loan Agreement.

         5.7 This  Agreement  shall be  binding  upon,  and  shall  inure to the
benefit  of, the  parties  hereto  and their  heirs,  personal  representatives,
successors and assigns.

         5.8 This  Agreement is made for the sole  protection and benefit of the
parties  hereto,  and no other  person or entity  shall have any right of action
hereon.

         5.9 This Agreement shall be governed by and construed  according to the
laws of the State of Arizona.
                                      -15-
<PAGE>
         IN  WITNESS  WHEREOF,  these  presents  are  executed  as of  the  date
indicated above.

                                        WELLS FARGO BANK, NATIONAL
                                        ASSOCIATION, as successor in 
                                        interest to FIRST
                                        INTERSTATE BANK OF ARIZONA, N.A.



                                        By:_____________________________________
                                        Name:___________________________________
                                        Its:____________________________________

                                                                         LENDER

                                        THREE-FIVE SYSTEMS, INC., a Delaware
                                        corporation



                                        By:_____________________________________
                                        Name:___________________________________
                                        Its:____________________________________

                                                                       BORROWER
                                      -16-